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Success With Options - Monthly Review, Issue #006 -- June Edition
June 01, 2010

Welcome to the June edition of this newsletter!

This is a monthly newsletter packed full of tidbits not found on the website. This is my attempt to stay connected with those who find value on the the website and want more.

Since this newsletter is published every month, you are always up to date and empowered to be a better trader. That's because I'll be sharing lessons I've learned over the prior month, answering questions from other viewers and providing a spotlight on useful websites and trading tips. If you find this newsletter valuable, pay it forward and send it to your options trading friends.

To access previous issues of the newsletter, click here.

Yup - The Run Was Over - June Newsletter

If you received last month's newsletter, you'll understand this month's newsletter title. It didn't take long for the May market to tip its hand.

While I expected a turn and perhaps a decent pullback, I didn't expect the intensity and magnitude of the selling. Unfortunately, this hit my open trades pretty hard. I'll talk more about this in the trade review section.

I've also been busy doing some reworking of pages, and adding new videos to the trade tutorial hosted on YouTube. I have a few more short videos planned, but I'm starting to plan a longer video. This will be one that won't be available from YouTube but will be hosted elsewhere (to be determined) and will be for sale for a small fee. I've been asked a number of times about more extensive videos and mentoring and this effort is in response to those requests. The first video will be made available on a limited basis with the intent of obtaining feedback for further videos. Once I fine tune this a little bit more, I'll probably be rolling out more videos over the remainder of the year. If you have particular topics you'd like covered, please use the contact me page on the website to make a suggestion.

I'm still anxious to receive feedback on the newsletter content and on ways I can make it more valuable for the readers. Please feel free to voice your opinion. I've received a few responses, but I'd really like to receive more feedback before considering any more changes. If you haven't done so already, please consider taking a few minutes to visit the newsletter feedback page and let your voice be heard. I don't require an email address to submit the feedback so you can do this anonymously.


In This Issue

1) New on the site

2) Trade of the week summary

3) Options Trading Tip

4) Answers to your questions

5) Options Outlook

What's new at Success With Options

Other than adding some additional trade pages and updating a few others, there are no major site changes. However, I will be adding a few new pages over the next month on option volatility and options and taxation. I know I said this in last month's newsletter as well. They are on the plan so look for at least one to be released this month.

On the video front, I completed the diagonal spread series by releasing the trade entry and trade management videos. Here's the link to the latest videos:

Watch for a few more updates in June...

Trade of the Week Summary

I was fairly active with trade tutorials for May. Some of the iron condor trades I put on in April closed with a loss as the market did a hard reversal. The good thing about these trades is that they were sized for max loss so I lost no more than planned. Overall, this has been a hard month in terms of returns but good in terms of teachable aspects in the trades.

The one trade that went well was the ITM diagonal spread. This trade went pretty much as expected and ended with a nice return. I even got a bonus opportunity to roll up a strike to pick up additional profit.

Here are the trades I put on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed Diagonal spread on IWM + $253 This is a one contract long diagonal spread that I rolled into an $8 wide spread in May. I closed it for almost the full $8 credit. I almost waited too long though with the market sell-off.
Closed SPY Iron Condor - $130 Another iron condor spread on the SPY. This trade had several adjustments on it, which helped minimize the loss. Ultimately, this one just got caught in the selling.
Closed EWZ Iron Condor -$360 Another iron condor spread. I was fairly neutral in the early part of the month. The EWZ ultimately was more weak relative to the other indices and it really hurt this trade. I had a small adjustment, which helped minimize the loss.
Open SPY call Calendar spread   I put this trade on partly as an adjustment to the SPY iron condor, which was being overrun on the call side. This trade also was a bit of a bullish trade in and of itself. With the sell-off, the May short call expired worthless leaving long the June $123 call.
Closed SPY call long vertical -$420 This trade is a long vertical spread, also known as a debit spread. It was a bullish trade that I didn't watch closely enough. The gap down caused this to be a bigger loser than anticipated.
Closed IWM put credit spread -$352 I put this trade on just before the market turned and it turned hard. The upshot was that I got stopped out shortly after entering. However, given the strength of the selling, its a good thing I had the stop in place
Open IWM put credit spread   I took the opportunity to enter another put credit spread near the bottom of the selling. The short strike is right below the 200 day moving average. I think a break of that level will signal more selling and an early exit opportunity.
Open Pairs trade EWZ/SPY   I entered this trade the last week of the month. It's a bit of an experiment in trading a weak index against a strong index. The initial puts on the SPY closed and I entered a smaller position a little higher up.

In terms of the open trades, time will tell how they work out. The point of these trade pages is to teach trade analysis, entry and management techniques. It's nice to get a lot of winners but it's also hard to learn anything from them.

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Trading Tip of the Month

This month I want to talk about the value of using a trade journal. If you've visited some of the pages on the website related to option trading systems, then this information won't necessarily be new. However, maybe I can add a new twist while making the case for the use of the trading journal.

I won't take time here to describe what a trading journal is since I've covered it in detail on the website. Let me instead simply pose a question. Let's assume you or I traded an average of 30 trades over the course of a month. At the end of a month, can you tell me how each of your trades performed? Can you tell me what mistakes were made? Can you tell me under what circumstances you followed your rules and when you didn't? Me either.

The problem is that when we trade more than a handful of individual trades in short period of time, most of us can't remember the details. In fact, most of use won't remember the specific thoughts that drove us to take an action on a given trade. That's true for trade entries, decisions to exit, adjust or do nothing. The value of the trade journal is that it gives us an objective way to look back after the trade has completed to see how well we executed the trade. At the end of each trading month, we should be able to review the trades we executed and answer the following questions.
  1. Did I make a correct decision on the strategy based on the market outlook at the time?
  2. Did I follow my entry rules, money management rules and exit rules?
  3. What mistakes did I make? What should I do differently?
  4. Are there any patterns that emerge? Are there habits that constantly cause me to lose money?
  5. Are there any potential adjustments I can look at to my trading rules?
Of course the value of the trading journal is only as good as the information that is captured at the time. I've found it is a difficult discipline to capture my thoughts regularly and in enough detail to be helpful a month down the road. However, I believe that the effort expended to master this discipline will pay off in spades. You and I will be much more aware of our trading flaws and will be much more in tune with the trades we are currently in.

Since you are receiving this newsletter, I presume you have already received the bonus download package that contains a template for the trading journal. I encourage you to give it a try. If it doesn't work just right, find your own way of tracking your trades. You may prefer to capture more or less information than the template enables. The important thing is being able to answer the questions I listed above.

Visit the website for a quick review of options trading systems and more detail on the trading journal.
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Answers to Your Questions

I frequently receive email from visitors to the site with questions that aren't answered directly from content on the site. Many of these are great questions and I think the answers would be valuable to all readers. Each month I'll be posting one or two questions, so stay tuned!

Here is a question I've received several times...

Q: I'm looking at a lot of the trades you've made this year, particularly the iron condor strategy and it looks like most of them lost money. That doesn't seem like a good advertisement for the strategies.

Ok, that's not really a question. There is usually a question embedded in there as well, but I believe that's the essence of the point. I've received this comment/observation/question more than once over the last several months. I've addressed it somewhat in the trade summary page but I want to take the time to address it here as well. I think perhaps the real question behind the question I'm getting is; "Why should I use these strategies if they lose this often?"  I'm going to give a quick response as to why the results are what they are but I want to really address what I believe is the point of these tutorials.

I believe that the trade results are not as ideal for several key reasons.
  1. I'm only trading a limited number of strategies. While I've tried to demonstrate a balanced portfolio trading strategy as well as individual portfolio strategies, I haven't had enough trades in place to be representative. In other words, my own portfolio has done better because I have more trades on with diverse strategies and a variety of entry points.
  2. This is a difficult market environment. While my own portfolio has done better, it has suffered as well with the market shifts. The truth is that sometimes you will have a string of losing trades. The key is to manage the losses through position sizing and effective trade management.
  3. Honestly, I haven't always managed these trade tutorials as well as I should have. One of the dangers of paper trading is that you tend to not treat it as seriously as when you have real money in the game.
With that said, I want to emphasize this purpose of the tutorials. It is NOT to prove the viability of the strategies. I am not trying to prove that these strategies make money or that my strategy selection skills are worthy of someone paying large monthly subscriptions to receive. If you've been following the tutorials and visiting the site, it's likely because you already are interested in the strategies and want to learn more about how to trade them.

My point It is to demonstrate the key skills of trading these advanced strategies. That includes strategy selection, analysis, position sizing and entry. That also includes ongoing management and learning to face the possibility of the trade going completely against you. No matter how good you are at selecting a strategy and doing the analysis prior to entry, trades will go against you. Learning to have a plan and execute the plan is the point of these tutorials.

Of course, it would be personally gratifying if every trade I put on was successful, but let me ask you this question. If every trade was successful and went as planned, what would be learned? Of course the mechanics of setting up the trade are demonstrated every time but beyond that, not much. I could demonstrate a few examples of each strategy and be done. The trick is learning to manage each trade within the market climate that exists at the moment and this is always different.

I want to conclude with this thought. If you could put on one or two dozen trades this year with real money and at the end of it be right where you started in terms of the balance, would that be worth it? What would you have learned in the 12-20 trades you executed (assuming you use a trade journal and trade log)? Would those lessons be worth not making any money at all - or perhaps even losing 1% over the year? In my mind, that's a pretty inexpensive education. It's certainly a much less expensive lesson than not having a money management strategy in place and paying 20-30% or more in portfolio loss to learn the importance of money management.

If you would like to submit  a question, comment or feedback on the website, please visit this page.

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Options Outlook

In concluding this newsletter, I want to provide a brief outlook for what I'm expecting for the next 20-40 days. Before I do, I need to insert the following disclaimer.

This is not a recommendation to buy or sell stock, ETFs or options. It is simply my opinion of what I expect and how I plan to trade. As such, it may change if the charts indicate something different.

In the May newsletter, I summarized my outlook as follows.

"There are the beginnings of a lower high/lower low being formed. I would prefer to see an even lower low before being convinced of a further sell-off. It is also possible that the SPX could resume a move up.  The combination of this plus the higher VIX causes me to be more inclined to believe in a sell-off. I think we'll see the SPX test the $1150 level before it resumes any move back to the highs. It wouldn't surprise me to see range bound market action for a while following this."

As it turned out, the market sold off even harder than I had expected. I believe I mentioned the possibility that more selling could occur but it certainly caught me by surprise as the trade of the week results indicated.

SPX Market outlook

I've re-adjusted the fibonacci levels to mark the recent high of almost $1225 and the low formed back in March of 2009. As the chart above shows, we came close to hitting the 38.2% retracement level. That measures the total percentage of the move from the low to the high that has been retraced. Another way to put this is that the SPX has given back almost 38.2% of the move from the March low to the recent high. I mention that because it wouldn't surprise me to see this level tested before a bottom is in place.

It's difficult to say at the moment which way the SPX will go. I'd say if a new high is formed above $1100, then the recent low may be the bottom of the sell-off but I wouldn't expect a raging rally because of it. If the recent lows are broken, I'd expect the SPX to sell off further - maybe even to $1000.

In this kind of market climate, what is an option trader to do? First, there's nothing wrong with sitting on the sidelines waiting for a trend to be established. If you are uncertain, it's better to sit on your hands than throw money down on a trade with a high risk of losing it. In the trade tutorials, I introduced a new trade called a pairs trade. I did this in a paper trading account because I'm not sure what will happen in the market yet. Paper trading can be a good use of time during periods of uncertainty. Think of it as a no cost way of trying out your market assumptions.

It's also not a bad idea to line up some bullish, bearish and neutral trade ideas to be ready once a trend emerges. What might be some good bearish strategies? Certainly selling call spreads would be a good one. What about a bearish diagonal spread if you are bearish longer term? How about neutral trades? With the volatility so high maybe an iron condor would be a good strategy. Don't let the recent performance in the trade tutorials discourage you from getting out there and trying something in a paper trading account.  If you're feeling really brave, put on a 1 contract iron condor with $2 wide spreads and about 30-35% probability of expiring worthless on each of the short strikes. That should give you about $100 in premium with $100 in risk. If that's too much, try the $1 wide spread with $50 in risk and $50 in premium.

The point is that even with the market in turmoil, you can still be getting out there with trades, whether in the paper money account or with very small risk trades in your real money accounts. DO NOT risk a real trade unless you can live with the loss of the trade. Trade with paper money instead, but trade. Practice the analysis, money management, entry and exits. Practice doing your own market analysis and use the trade journals to see how you did.

More on technical analysis.

Options strategies I use

Be sure to take time to provide feedback on the newsletter.

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